Tax Filing Season at Risk of Delay as Budget Talks Drag

The Internal Revenue Service is tracking congressional budget squabbles as the agency tries to determine if it can start the tax filing season on time in mid-January.

With fewer than two weeks left in the year, Congress hasn’t prevented expansion of the alternative minimum tax for 2012. Unless lawmakers act, tax filing for more than one-third of taxpayers might be delayed until at least late March.

For one thing, 32 million taxpayers collectively would owe $92 billion more in taxes if a so-called AMT patch isn’t enacted. Further, inaction would require the IRS to reprogram and test its computer systems. Officials must gauge by early January whether Congress is likely to act on the AMT, as it routinely has done in past years.

“It’s a very challenging situation,” said Linda Stiff, a former acting IRS commissioner and now a managing director at PricewaterhouseCoopers LLP in Washington. “This country has a really strong system of voluntary compliance and that’s kind of built for decades around people knowing what’s going to happen from January to April.”

The alternative minimum tax, a parallel tax system created in 1969 to ensure that wealthy people couldn’t avoid all taxes, is scheduled to expand to about 32 million households for 2012, up from about 4 million otherwise.

Bipartisan Agreement

A bipartisan agreement to continue to prevent the AMT’s expansion hasn’t been matched with action. The issue is bound up in the unresolved budget debate between President Barack Obama and House Speaker John Boehner.

The IRS programmed its computer systems assuming that Congress would eventually patch the AMT, as it regularly does to offset inflation that isn’t accounted for in the permanent law. The patch creates higher exemption amounts so that taxpayers can continue to pay under the regular tax system.

It also allows some tax credits to be counted against AMT, affecting millions of taxpayers.

“If in fact there is no patch, they need to go back and change everything,” said Ed Karl, vice president of taxation at the American Institute of Certified Public Accountants in Washington.

The AMT tends to affect residents of high-tax states because it prevents taxpayers from deducting state and local taxes. Without the patch, about half of New Jersey households would pay taxes under the AMT for 2012.

No ‘Magic Time’

The IRS wants Congress to make a decision as soon as possible, acting commissioner Steven Miller said in a Dec. 6 speech. He added that there was no “magic time” for the agency to determine how it will respond.

The government estimates that taxpayers collectively would owe an additional $92 billion without a patch, and the IRS says that more than 60 million taxpayers would be unable to file promptly.

If Congress doesn’t act, the IRS hasn’t said exactly what types of taxpayers would be able to file immediately and who would have to wait.

No matter what the IRS does, Stiff said, the agency will have to start preparing to answer questions from bewildered taxpayers.

Stiff was acting commissioner for most of the 2008 filing season. That year, the IRS was grappling with the late December 2007 enactment of an AMT patch and the administration of a stimulus program that sent checks to taxpayers. According to the National Taxpayer Advocate, the average wait time for callers to the IRS doubled that year to more than 10 minutes.

‘Confusion and Uncertainty’

“When you have this kind of confusion and uncertainty,” she said, “you have this increased call volume.”

The potential for a delayed or bifurcated filing season reflects the dual roles of the IRS. For many taxpayers with higher incomes, the agency collects payments close to the April 15 deadline for annual filing.

For lower-income households, the tax refund, often driven by the earned income tax credit, is a major financial event. In 2011, 75 percent of tax filers received refunds averaging $2,913, according to IRS.

The IRS won’t rush the weeks of reprogramming and testing its computers, because the accuracy of the system affects tax compliance, Karl said.

Proper Command

“It impacts the public’s thinking when the IRS doesn’t do a good job,” he said. “It’s very important for the IRS not only to do it right but give the impression that they’re in proper command of what they need to do.”

The AMT isn’t the only lapsed tax provision that Congress hasn’t addressed for 2012. Dozens of business tax breaks expired at the end of 2011 as did individual breaks, such as the ability to deduct sales taxes and teachers’ out-of-pocket expenses.

Even as Congress has failed so far to act on the AMT, both parties have offered a way out.

Obama’s latest budget offer to Republicans and Boehner’s backup plan both would permanently patch the AMT. Neither plan has come up for a vote.